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Domestic Asset Protection Trusts (Portfolio 868)

Tax Management Portfolio, Domestic Asset Protection Trusts*, No. 868, discusses various aspects of domestic asset protection trusts (APTs), including the reasons for and against recognizing such trusts, the benefits of such trusts, and the potential application of the fraudulent transfer rules.

DESCRIPTION

Tax Management Portfolio, Domestic Asset Protection Trusts*, No. 868, discusses various aspects of domestic asset protection trusts (APTs), including the reasons for and against recognizing such trusts, the benefits of such trusts, and the potential application of the fraudulent transfer rules. An APT is an irrevocable trust in which the settlor retains some benefits that cannot be reached by his or her creditors. The portfolio gives particular attention to defending APTs against creditor attacks, noting, where appropriate, matters addressed by the Uniform Trust Code or the Restatement (Second) Conflict of Laws. The portfolio also discusses the ethical and liability concerns of attorneys involved in domestic APT planning. In addition, the portfolio covers the income and transfer tax ramifications of domestic APTs. The ability of a creditor to reach trust assets often impacts whether a transfer to a domestic APT is a completed gift and whether a domestic APT will be included in the settlor's estate. After reviewing various state statutes governing domestic APTs, the portfolio compares Delaware APTs to Alaska and Nevada APTs. The portfolio then compares domestic APTs to foreign APTs. The portfolio concludes by describing the designing, drafting, and funding of domestic APTs and various issues related to trust distributions. To avoid distribution problems, the portfolio recommends, among other things, that the attorney and trustee make it clear to the APT's settlor at the beginning that the settlor will receive distributions only in accordance with the trust terms. This portfolio is not designed or intended to provide financial, tax, legal, accounting, or other professional advice because such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional adviser should be sought. This portfolio is for informational purposes only; it is not intended as a recommendation, offer, or solicitation with respect to the purchase or sale of any security. This portfolio may be cited as Nenno & Sullivan, 868 T.M., Domestic Asset Protection Trusts.

JOHN E. SULLIVAN, III, ESQ.

John E. Sullivan, III, Esq., Boston College (1980), University of Texas School of Law (1984); founding member, law firm of Sullivan & Sullivan, Ltd., Beachwood (Cleveland), Ohio; admitted to practice, Ohio, Massachusetts, Illinois, and numerous federal courts, including U.S. Supreme Court and Tax Court; named as one of “Top 100 Attorneys” in United States by Robb Report's Worth Magazine (Dec. 2005); quoted or cited in Bloomberg Wealth Manager, Wall Street Journal, and Forbes.com; practice includes asset protection, asset recovery, and estate and business planning; frequent lecturer on debtor-creditor and asset protection matters; author of numerous articles on these matters, including one that was favorably cited and quoted by federal bankruptcy court in In re Bergman, 293 Bankr. 580 (Bankr. W.D. N.Y. 2003); editor and contributing author, International Trust Laws and Analysis, most recently published by Kluwer Law Publishing in The Hague (1998–2007); former contributing editor, Tax Havens of the World, then-published by Lexis/Nexis; guest lecturer, International Business Organizations Course at Case Western Reserve University Law School, Cleveland, Ohio; peer reviewer, Oxford University Press, in connection with proposed academic text on anti-money laundering issues; participant, American Enterprise Institute's 2007 Roundtable on Regulatory Competition and Offshore Financial Centers; member, International Tax Planning Association, Offshore Institute, Cleveland Estate Planning Council, Ohio State Bar Association (OSBA), Creditor Access to IRA Committee (part of OSBA's Estate Planning, Trust, and Probate Law Section), OSBA's Banking, Commercial & Bankruptcy Law Committee and Bankruptcy Law Sub-Committee, and Greater Cleveland International Lawyers Group.

TABLE OF CONTENTS

Portfolio 868-1st: Domestic Asset Protection Trusts

Portfolio Description

Authors

Technical Advisors

Description

Detailed Analysis

I. Introduction

A. Traditional Rule

B. Effect of Traditional Rule

C. Domestic APT Option

D. Reasons Against Recognizing Domestic APTs

1. One Should Pay One's Debts

2. Preserve Liability System

3. Domestic APTs “Always” Are Fraudulent

E. Reasons for Recognizing Domestic APTs

1. Authorities Do Not Support the Scott Treatise

2. United States Is Unique (Although Less so with Each Domestic APT Law)

3. Creditors Are Given More Rights than Settlors

4. Interests of Other Beneficiaries Are Ignored

5. Settlor's Continuing Control (or Lack Thereof) Is Relevant, as Is Governing Statute

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